East Africa’s Credit Slowdown Threatens Economic Expansion

East Africa’s three biggest economies are struggling to arrest a slowdown in the growth of loans to businesses and individuals that threatens to curb economic output in the continent’s fastest-growing region.

Bank credit to the private sector in Kenya, Tanzania and Uganda is growing at the slowest pace in well over a decade. And while the authorities have eased monetary policy and, in Kenya’s case, capped commercial interest rates to encourage more lending, analysts including Standard Chartered Plc’s Razia Khan aren’t expecting a turnaround any time soon.

“Credit growth is slowing as businesses and consumers that borrowed more than they could otherwise afford now struggle to repay or refinance loans,” said Chris Becker, frontier strategist at Johannesburg-based brokerage Investec Prime Services.

The International Monetary Fund in February cut its growth forecast for Kenya’s economy to 5.3 percent in 2017-18 from a prior estimate of 6.1 percent, citing the credit slump and factors including a drought. While the fund has kept its projection for Tanzania at 7 percent this year, the outlook is at risk if there’s a “prolonged slowdown” in credit growth, it said in January. The virtual standstill in credit growth in Uganda, where the economy is expected to expand 5.5 percent this year, is creating an “air of uneasiness and uncertainty,” the lender said.

Tanzania’s economy probably expanded by 6.9 percent in 2016, compared with a government’s estimate of 7 percent, weighed down by weaker credit growth and a slower pace of budget implementation, the World Bank said Tuesday.

Credit to the Kenyan private sector grew 4.9 percent in December, the slowest pace since 2003 and compared with a record 35.9 percent in 2011, according to central bank data compiled by Bloomberg. In Tanzania, the increase was 5.2 percent in January, the lowest since 2000, while in Uganda it was 7.5 percent in February, after growing less than 10 percent most of last year and even contracting in two months.

While economies in the region have been boosted by an improved regulatory regime and more investment in railways, ports and telecommunications, growth will slow unless banks increase lending, said Jacques Nel, an economist at Paarl, South Africa-based NKC African Economics.

“If companies are unable to borrow, consumers are not accessing credit, it’s a dampener on growth,” he said.

The credit slowdown in Kenya was triggered by a cash crunch in 2015 that caused a spike in government bond yields, sparking demand for the securities by lenders. The collapse of three Kenyan banks in eight months heightened risk aversion that was further exacerbated by the central bank asking lenders to reclassify some loans and increase provisioning for bad debts. As a result, non-performing loans surged. The deterioration in credit growth worsened in 2016 when President Uhuru Kenyatta introduced a law capping lending rates at 400 basis points above the benchmark rate to try to encourage banks to increase advances.

‘Elevated Cautiousness’

In Tanzania, banks have an “elevated cautiousness” about lending as non-performing loans increased to 9.5 percent of total advances in 2016 from 6.4 percent previously. The decline in lending is being exacerbated by “erratic policy making” by President John Magufuli, such as a recent ban on exports of unprocessed minerals and forcing telecommunications companies to list, that is damaging business confidence, Yvonne Mhango, a Johannesburg-based economist at Renaissance Capital, said by email.

Increased provisioning for bad debt has been the main driver of the drop in lending in Uganda, which has made banks more risk-averse, according to the central bank.

In all three markets policy markets realize the situation doesn’t bode well for output and are assessing measures to return growth to the 6 percent and 7 percent range the region had in the past, Standard Chartered Bank Kenya Ltd. Chief Executive Officer Lamin Manjang said in an interview.

Recovery in Tanzanian and Kenyan lending in the near-term is unlikely because of continuing unease about Magufuli and Kenyatta’s policies, according to Standard Chartered’s Khan. Uganda, which is already showing some signs of a recovery in lending, has a better chance as bad-debt levels there may have peaked after the central bank cut interest rates, she said. Impairments rose to 8.3 percent in June 2016 from 4 percent a year earlier.

“When the decline in credit growth becomes entrenched, the negative effect will slow the economy,” Jibran Qureishi, East Africa economist at Stanbic Holdings Ltd., said by phone. “You can’t ignore the importance of credit growth.”

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Peter Omondi - Founder and Editor in ChiefEducation: Universite De Geneve- International Organization Management: Universite Catholique de Louvain- International Human Right Law Our aim is to gather the different African narratives from scattered sources and localize the narratives for our readers.